QR National still an uncertain bet

Updated
November 02, 2010 00:24:00

The jury is still out on whether QR National represents the stock market opportunity of the year or a great train robbery, but retail investors only have another 11 days to decide before the offer closes.

PHILLIP LASKER, PRESENTER: There's no doubting it really is something big, as the endless adverts proclaim.

But the jury is out on whether QR National represents the stockmarket opportunity of the year or a great train robbery.

Retail investors have another 11 days to make a decision before the offer closes.

The Queensland Government is spending big to get them on board, but some say the numbers simply don't add up.

Andrew Robertson reports.

QR NATIONAL TV ADVERTISEMENT (male voiceover): You can now apply for shares in QR National.

ANDREW ROBERTSON, REPORTER: The question is: would you want to? And there are plenty of people lining up to cast doubt on the Queensland Government's partial privatisation of one of its biggest infrastructure assets.

KIERAN KELLY, SIRIUS FUNDS MANAGEMENT: Anywhere between 16 and 20 times earnings two years out for an industrial stock in this market is just too expensive.

ANDREW ROBERTSON: QR National is being priced in a range from $2.50 to $3 per share, with a guarantee for small investors that they won't pay more than $2.80. The exact price will be determined when institutional investors bid for shares on 18th and 19th of November.

Those indicative prices would give QR National a market value of between $6.1 and $7.3 billion.

GREG CANAVAN, EDITOR, SOUND MONEY SOUND INVESTMENTS: When you're looking at tangible assets, it's quite an easy asset to sell to people and say, "Look, you're getting a piece of this, you're getting a piece of railways rolling stock." But it all comes down to the pricing and it all comes down to what you're paying to get those assets.

ANDREW ROBERTSON: And like Sirius Asset Management's Kieran Kelly, Greg Canavan believes that based on the numbers in the QR National prospectus, a minimum price of $2.50 a share is too much.

GREG CANAVAN: If you're paying the book value price for this business, which is roughly where the offer is coming in at, you're getting essentially a - lucky to be getting a six per cent return as a business owner.

Now, the share price can do many things depending on the sentiment at the time of listing, but if you're a long-term owner or long-term shareholder in this business, you're locking yourself into a reasonably low return.

ANDREW ROBERTSON: Funds manager Roger Montgomery agrees with Greg Canavan and Kieran Kelly that the price is too high. Among his concerns is QR National's plans for billions of dollars in capital expenditure.

ROGER MONTGOMERY, FUNDS MANAGER: The reality is shareholders, investors have to write cheques for $3 billion. I mean, I wouldn't wanna own a business where I had to reach into my pocket and write a cheque for $3 billion decades after the business began.

ANDREW ROBERTSON: For Kieran Kelly, the Queensland Government's decision to retain a large shareholding in QR National carries big risks for potential shareholders and it reminds him of the float of Telstra.

KIERAN KELLY: They're assets that don't have alternative uses, they're network-type assets, they come with a quasi-monopoly that can be dismantled by a future government.

But worst of all they come with this terrible problem that these assets will be used by these governments as instruments of public policy.

ANDREW ROBERTSON: Not surprisingly, those closer to the QR National float have a different view. UBS is one of the joint lead managers arranging the share sale and it's accused the critics of trying to deliberately talk the price down so they can buy shares more cheaply.

GUY FOWLER, MD, UBS AUSTRALIA: That's par for the course for any large IPO. It's sort of the jockeying for position that usually happens. You know, what I would say is that the - the best analogy to put, I guess, is that you don't see people turning up to a house auction shouting how much they love the house and how much they wanna pay.

ANDREW ROBERTSON: The critics are saying to me that the profits just aren't there to justify the price that you've put on it.

GUY FOWLER: It's interesting. I've seen a lot of an analysis sort of saying that return on assets aren't there, the return on equity isn't high enough. I mean, therein lies the opportunity.

I mean, you've got an entity which is coming out of government ownership, where it's been for 145 years, not earning an appropriate return on its assets.

ANDREW ROBERTSON: So you should ignore the fact that the current return on equity return on capital is about what you could get in the bank?

GUY FOWLER: What I'd say is I'd prefer to invest in a company who's starting low and growing, rather than buying something that's got - that's at peak performance.

ANDREW ROBERTSON: QR National shares will hit the boards of the ASX on 22nd November. The Queensland Government will be hoping the float can get up a head of steam between now and then.